IOSCO Consults on Principles regarding the Custody of CIS Assets
The report is aimed at gathering the views of investment managers, custodians, institutional investors and other interested parties on the development of a set of principles for the custody of Collective Investment Schemes’ (CIS) Assets.
A number of market developments have occurred since publication in 1996 of the IOSCO paper on the Guidance on Custody Arrangements for Collective Investment Schemes, leading IOSCO to revisit its published guidance. Events like the Lehman Brothers and MF Global insolvencies or the Madoff fraud have focused attention on CIS asset protection regimes.
CIS managers tend to invest more in complex instruments today than they did in the 1990s. The wider array of eligible investment instruments raises questions about the scope of the custodian ́s safekeeping role and duties.
Taking into account these recent market developments, the consultation paper explores the key risks associated with the custody function.
The Proposed Principles
While acknowledging that the regulatory regimes for the safekeeping of CIS assets are diverse, and the responsibilities and regulatory status of the entities that provide safekeeping services are also varied, the report published today proposes nine principles aimed at identifying the core issues.
1: The regulatory regime should make appropriate provisions for the custodial arrangements of the CIS.
2: CIS assets should be segregated from the assets of the responsible entity, its related entities and other schemes
3: CIS assets should be entrusted to a third party custodian.
4: The custodian should be functionally independent from the responsible entity.
5: The responsible entity should seek to ensure that the custody arrangements in place are disclosed appropriately to investors in the CIS offering documents or otherwise made transparent to investors.
6: The responsible entity should use appropriate care, skill and diligence when appointing a custodian to safe keep CIS assets.
7: The responsible entity should, at a minimum, consider a custodian's legal / regulatory status, financial resources and organisational capabilities during the due diligence process.
8: The responsible entity should formally document its relationship with the custodian and the agreement should seek to include provisions about the scope of the custodian's responsibility and liability.
9: Custody arrangements should be monitored on an ongoing basis for compliance with the terms of the custody agreement.
IOSCO welcomes the comments on this consultation report in order to be able to better inform the formulation of a final report with adopted principles.
Comments should be submitted on or before Wednesday 10 December 2014.